Auction market with price improvement mechanism

ABSTRACT

A system for auctioning financial products over a distributed, networked computer system includes a plurality of workstations for entering orders for financial products into the distributed, networked computer system. The orders specify a price for the financial product, a quantity of the financial product and exposure time which the order can remain active. The system also includes a plurality of workstations for entering predefined relative indication and responses to orders for the product. The predefined relative indications specify a willingness to trade. The responses specify a price and quantity. The system includes a server computer coupled to the workstations for entering the orders, predefined relative indications, and the responses, with the server computer executing a server process that for a first one of said orders, determines a match to said first order with the predefined relative indications, responses and contra-side orders during an interval determined by the exposure time specified by said first order.

BACKGROUND

[0001] This invention relates to an automated auction system for tradingproducts such as equity securities.

[0002] There are known auction processes. One type of auction process isa live auction used to trade antiques or paintings, for example. Otherauctions include live auction processes for financial instruments suchas, for example, futures contacts, and for equities in a stock exchange.Examples of live auction processes for stocks include the New York StockExchange® (NYSE) or the American Stock Exchange® (AMEX).

[0003] On the NYSE and AMEX, for example, orders to buy and sellgenerally are not executed with an automated process. Instead, a personcalled a “specialist” stands in front of a crowd, taking orders from thecrowd and tries to match the orders with other participants in thecrowd, his own account, or sends them to other market centers. Whilemany of the tools a specialist uses to receive orders and record andreport final trades are automated, the executions themselves, includingthe decisions and processes to execute, are overseen in a manual manner.This is in contrast to automated markets, such as the Nasdaq StockMarket, where executions often take place without human intervention.The Nasdaq Stock Market® is an example of an electronic negotiatedmarket involving dealers that negotiate a trade for a security for theirown account or for that of a client. Transaction recording and reportingin the NYSE and AMEX exchanges and The Nasdaq Stock Market are generallyautomated.

[0004] Other types of auctions are so called “call” or “periodic”auctions such as the Arizona Stock Exchange and the OptiMark™ tradingsystem. In these types of auctions, orders are matched only at specifiedtimes during the day.

SUMMARY

[0005] According to an aspect of the invention, a method of auctioningproducts over a distributed networked computer system is provided. Themethod is executed over the system and includes entering an order for aproduct. The order can specify a price. The price can be a fixed price,a relative price or a market price. The order also specifies a quantityand an exposure time. The process also includes entering a response toan order, the response specifying a price, price improvement, andquantity and matching the order with the response in accordance with theexposure time specified by the order.

[0006] According to an additional aspect of the invention, a method caninclude entering pre-defined relative indications that correspond to awillingness to buy or sell the product and wherein the pre-definedrelative indications specify a price relative to a current market price.

[0007] According to an additional aspect of the invention, a method ofauctioning financial products over a distributed, networked computersystem includes entering orders for financial products into thedistributed, networked computer system, said orders specifying a pricefor the financial product, a quantity of the financial product andexposure time which the order can remain active and entering responsesto orders for the product, said responses specifying a price andquantity. For a first one of the orders, matching said first order tothe responses and contra-side orders, during an interval determined bythe exposure time specified by said first order, and expiring the firstone of the orders if no matching responses or others of said orders arereceived during the exposure period.

[0008] According to an additional aspect of the invention, a computerprogram product for auctioning products, the computer program productresiding on a computer readable medium comprising instructions forcausing a computer to receive an order that was entered for a product,the order specifying price, quantity and exposure time and receive aresponse that was entered in response to an order, the responsespecifying a price, price improvement, and quantity. The program alsoincludes instructions to match the order with the response during theexposure time specified by the order.

[0009] According to an additional aspect of the invention, a system forauctioning financial products over a distributed, networked computersystem includes a plurality of workstations for entering orders forfinancial products into the distributed, networked computer system. Theorders specify a price for the financial product, a quantity of thefinancial product and exposure time which the order can remain active.The system also includes a plurality of workstations for enteringresponses to orders for the product. The responses specify a price andquantity. The system includes a server computer coupled to theworkstations for entering the orders and the responses, with the servercomputer executing a server process that, for a first one of saidorders, determines a match to said first order with the responses andothers of said orders during an interval determined by the exposure timespecified by said first order.

[0010] One or more of the following advantages may be provided byaspects of the invention. The auction process is active when an order ispresented to the system. Thus, unlike the auction markets with physicaltrading floors and crowds, the auction process and system of the presentinvention provides complete automation for both access and execution fortransactions. An auction is available anytime an order arrives in thesystem. The order can be immediately matched with a contra side order ifavailable, instead of having to wait until a specified time of day orinterval to elapse.

[0011] Entries to match against an order in the auction system caninclude fixed price, relative price and predefined relative indications.Responses which are entered in response to entry of an order can have alifespan but preferably responses have no lifespan, that is, they areeither immediately matched or canceled.

[0012] The entity entering the responses can choose what types of ordersto respond to. For example, there are two broad types of orders, publicagency orders, e.g., a retail customer, or institutional customer andprofessional orders, e.g. professional traders or broker dealers tradingfor their own account. There are corresponding types of responses,public responses and professional responses. Often persons who enterpublic responses may not want to deal with professional traders sincethe professional traders may have more knowledge concerning order flow,volume and so forth. This system allows them to select the type of orderto respond to.

[0013] The auction system permits the use of pre-defined relativeindications. A pre-defined relative indication, therefore, is awillingness or an expression to trade that resides in the system andremains dormant and unseen by other participants. This mechanism alsoallows trading interest to remain anonymous as to price, size andidentity. A pre-defined relative indication, when activated, becomes aresponse that is priced relative to a standard reference quote, e.g.,the National Best Bid/offer (NBBO).

BRIEF DESCRIPTION OF THE DRAWINGS

[0014]FIG. 1 is a block diagram of an auction system.

[0015] FIGS. 2-8 are block diagrams of auction examples.

[0016] FIGS. 9A-9C are flow charts showing entry formats for orders,responses and pre-defined relative indications.

[0017] FIGS. 10A-10C are flow charts showing the auction process used inthe system of FIG. 1.

[0018]FIG. 11 is a flow chart showing a pre-defined relative indicationqueue ordering process.

[0019]FIG. 12 is a flow chart of a response match process used in theprocess of FIGS. 10A-10C.

DESCRIPTION

[0020] Referring now to FIG. 1, a networked auction system 10 designedto facilitate trading of products such as real property, personalproperty, and financial property such as equity securities and/or otherfinancial instruments such as bonds, options, futures, and so forth isshown. The networked auction system 10 will be described in terms of asystem and process in which financial instruments such as stocks areauctioned. Any product could be auctioned particularly if the producthas a value or price that can vary over short periods of time.

[0021] The networked auction system 10 includes an order entry side 12comprised of any/all of broker/dealer systems 12 a, electroniccommunication network (ECN) systems 12 b and public participant systems12 c that enable members of the public to participate in the networkedauction system 10 either directly, via the Internet, or indirectly, viathe Internet or another communication medium, through a sponsor such asa broker/dealer. Each of the systems 12 allow the various participantsto enter orders into an automated auction system 20. The order entryportion 12 of the networked auction system 10 can also include daytrader systems 12 d, institutional systems 12 e, exchange specialists 12f, and option market makers 12 g.

[0022] The networked auction system 10 also includes an order responseside 14. The order response side 14 can include the same participantsincluding broker/dealer systems 14 a, ECN systems 14 b, Internet basedparticipant systems 14 c, either direct or sponsored, day trader systems14 d and institutional systems 14 e and exchange specialists 14 f, andoption market makers 14 g. The responders can use the same physicalsystem as is used to enter orders except the responders would use anorder response process. These systems 14 may be referred to herein asthe “crowd.” With these order response systems 14, when an order ispresented, via the order entry systems 12 a-12 g, any one or more of theorder response systems 14 a-14 g can respond to the order. Whicheverorder response system 14 responds first to the order and meets orexceeds the terms of the order will result in a match for execution. Theresponse systems 14 a-14 g can also enter pre-defined relativeindications (described below) that express a participant's willingnessto trade. Each of the order entry systems 12 a-12 g and order responsesystems 14 a-14 g are representative of types of trader systems and, infact, in any practical example of such a system, there could be manyhundreds, thousands, etc. of any one type or other types of order entryand order response systems.

[0023] The order entry systems 12 or the order response systems 14 canbe workstations. The workstations can have an interface to communicatewith the automated auction system 20. Alternatively, the workstationscan have an application program interface that is developed to interfacewith the automated auction system 20 or the Financial InformationExchange protocol customized to the auction system 20.

[0024] The automated auction system 20 includes at least one serversystem 21 including a process 21 a that is coupled to the order systems12 and response systems 14 via a network (not shown) parts of which canbe proprietary networks and parts of which can be the Internet. Theserver system 21 executes a server process 100 (FIGS. 10A-10C) that isstored on a storage medium 21 b and which is executed in computer mainmemory 216 that is part of the server 21. The auction system 20 also iscoupled to an exchange clearing submission system 16 and an exchangetrade reporting system 18. The automated auction system 20 submitsexchange clearing submissions to the clearing system 16 and reportsexecution of trades to the reporting system 18. Trade reporting isaccomplished for every execution, (e.g. within 90 seconds of theexecution of the trade), so that the trade can be reported fordissemination to vendors of market news, i.e., news outlets, and soforth. The reporting system 18 is a Securities and Exchange Commission(SEC) or other regulatory approved or authorized process through whichall trade reports in public securities are disseminated, i.e., theConsolidated Tape Association (CTA) for exchange-listed stocks, andthrough the NASD/Nasdaq for Nasdaq-listed stocks.

[0025] The automated auction system 20 can be a facility of a stockexchange, a market or a self regulatory organization (SRO). As afacility of an SRO which may include an exchange or market, every tradethat is executed in the automated auction system 20 is given to the SROso that the SRO can report the trade and perform other regulatory andclerical operations.

[0026] The automated auction system 20 matches orders with responses,other orders, and pre-defined relative indications of willingness totrade. Once an order is matched to a response, another order, orpre-defined relative indication, the match is considered a preliminaryexecution in the automated auction system 20. The preliminary executionis given to the market or exchange, as appropriate, so that thepreliminary execution can be validated. If the preliminary execution isa good execution, it is validated and forwarded to a clearingcorporation for clearance and settlement. For example, the exchange canvalidate that it is a good execution, consistent with the rules of theSRO and the Securities Exchange Commission (SEC) or equivalentregulatory authority and that there are no existing orders that couldhave been executed or that none of the parties are suspended fromtrading, and so forth. The exchange trade clearing 16 and reporting 18are, in general, conventional, the manner that the automated auctionsystem 20 would interface to the exchange trade clearing 16 andreporting 18 could be specified by the those systems.

[0027] Each order in the automated auction system 20 has a life span.The maximum life span of an order is determined by the order entry side14 of the auction 10. The life span can be variable and can be any settime period. Fixed time periods are preferred for trading financialsecurities such as stocks. Exemplary fixed time periods are a 15 secondorder, a 30 second order or a 0 second order. The fixed time periods canbe chosen taking into consideration the nature of the product that isbeing traded, any regulatory rules that are imposed on trading theproduct, as well as, the nature of the market activity. For a financialinstrument such as stocks, regulatory rules are generally very importantin determining time periods. Other times may be used even for financialinstruments based on changes in regulatory rules. At the instant oforder entry, an order is exposed to the crowd for the exposure timespecified in the order. However, an execution can always end the auctionsooner, as will be described below.

[0028] Aspects of the auction system rely upon relative prices. Theseprices are relative to a standard, variable market price. One standardpricing mechanism used in the auction system 10 when auctioning stocksis The National Best Bid/offer (NBBO). The NBBO is a standardized quotein the securities industry for the national market systems bestconsolidated quotation. The National Best Bid/Offer is a quantifiableprice to buy and sell. The NBBO is always changing and could changeduring the life of an order having an impact on the final price. Therelative pricing mechanism uses the NBBO and a price improvement “pi” toproduce relative prices. The “pi” enables an order to achieve the bestprice in the market at the current time. The provision of the priceimprovement relative to the NBBO or other standard market quote wouldtend to improve the execution price relative to the spread, i.e., thedifference between bid and offer prices for any product or security. Italso facilitates decimal denominated trading by enabling small priceimprovements of one (1) cent or even less.

[0029] Referring now to FIG. 2, an auction example 25 a is shown. Anorder entry participant 12 (FIG. 1), e.g., a broker/dealer system 12 a,for example, enters a customer order 30 to sell a certain number ofshares, e.g., 500 shares of “XYZ” stock at the market. The order 30 isentered with an order type i.e., buy (B) or sell (S), the number ofshares, name of security and an exposure time, e.g., 15 seconds andoptional conditions. The National Best Bid Offer 32 (NBBO) is receivedby the automated auction system 20 for a price 125-125 {fraction(1/16)}. The National Best Bid Offer price at this time is only astarting reference price for the auction. In this example, the auctionhas a maximum life span of 15 seconds. The entry of the order 30 startsthe auction. The auction ends, as soon as some response that meets theminimum qualifications of the order is received provided that the orderis still actively exposed to the crowd.

[0030] Responses in the auction system 20 can include fixed price,relative price and predefined relative indications. Responses can have alifespan, but preferably responses have no lifespan. That is, they areeither immediately matched or canceled. The responses can be permittedto choose what types of orders they respond to. For example, there aretwo broad types of orders, public agency orders, e.g., a retailcustomer, or institutional customer. The second type is professionalorders, e.g., professional traders or broker dealers trading for theirown account.

[0031] In the example of FIG. 2, if broker/dealer B enters via a system14 a with a buy response 34 of a fixed variety, at 125.03 for 500 sharesof “XYZ” and thereafter but within the exposure time, broker/dealer Centers, via another system 14 a, a buy response 36 of a relativevariety, at an NBBO+0.03 for 500 shares (which is 125 the NBB+$0.03 aprice improvement), the automated auction system 20 will execute theorder between broker/dealer A and broker/dealer B since broker/dealerB's order met the qualifications of the auction and it arrived first.This example illustrates that if there are two responses to an order atthe same effective price (i.e., either fixed as was response 34 orrelative to the NBBO, as was response 36) the response first in timewill be executed. In this example, the second response of broker/dealerC is not matched with the order for execution even if it was at a higherprice, because the first response of broker/dealer C arrived first andsatisfied the order in its entirety.

[0032] If there was a portion of the order left over, that is, the firstbroker/dealer's response 34 was for less than the initial order, thenthe second broker/dealer's response 36 would have a chance at anyremainder. In that case, they could both execute. If, for a customerorder to sell 800 shares of “XYZ” (not shown), broker/dealer B'sresponse 34 to buy would result in a trade for 500 shares atbroker/dealer B's price and broker/dealer C's response 36 would resultin the remaining 300 shares at broker/dealer C's price which may bedifferent.

[0033] As soon as the terms and conditions are fully met by a response,that response ends the auction. The automated auction system 20 isactive for a maximum time of either the 15 seconds or 30 seconds thatwas chosen at the time of order entry. The automated auction system 20also ends the auction for an order, if there were no pre-definedindications and no response that satisfied the order and any conditionsattached to the order and chosen exposure time. Thereafter, if the orderis not executed in the automated auction system 20, the order may beeligible for a market maker guarantee or sent for execution outside ofthe system. For example, the order may be entitled either a guarantee orexecution elsewhere, as will be described below. The automated auctionsystem 20 will forward the executions to the exchange for validation,trade reporting and clearance.

[0034] Referring now to FIG. 3, a second auction example 25 b is shown.In this example, a customer order 40 is entered for 600 shares of “XXY”to sell at the market, i.e., at the National Best Bid Offer NBBO 42 atthe time of the order execution. The exposure time is 15 seconds. Thisexample is illustrative of order entry where there are two pre-defined,relative indications.

[0035] In this auction example 25 b, the customer order 40 will acceptwhatever the best bid is at the time the order 40 is entered. Thecustomer places a 15 second lifetime on the order 40. Assume that theNBBO price 42 at the time the order is entered is 49-49 ⅛, and thatbroker/dealer B and broker/dealer C had previously entered pre-definedrelative indications to buy, 44, 46, respectively. These pre-definedrelative indications 44, 46 are responses that are entered into theauction system 20 prior to entry of an order. They are relative, meaningthat they are relative to what the NBBO is at the moment they can bematched with an order. A ranking process 105 that prioritizes receivedpre-defined relative indications by price improvement and time isdescribed in FIG. 11.

[0036] In this example, broker/dealer B and broker/dealer C each havepre-defined relative indications which indicate that each would bewilling to participate, as in the auction system 20, to an order whichis presented at the relative price of the National Best Bid Offer andoptionally some price improvement. Since the customer is a seller, therelative price is the National Best Bid (NBB) and customer is willing toaccept whatever that bid is. The broker/dealer B is willing to pay justthe NBB and broker/dealer C is willing to pay the NBB+0.05.Broker/dealer C's pre-defined indication 46 is willing to improve theNational Best Bid (NBB) by 5 cents. If the quote was 49-49 ⅛ at the timethe order from the crowd came in, broker/dealer B's response is based ona price of 49, the best bid, broker/dealer C's relative response is 49plus $0.05 for 1000 shares. Broker/dealer C had a pre-defined relativeindication 44 at a higher price than broker/dealer B's pre-definedrelative indication 44 and therefore has higher priority. Broker/dealerC's pre-defined relative indication 46 therefore satisfies the order 40and thus broker/dealer C buys the 600 shares at 49 plus $0.05.Broker/dealer C is left with a remaining pre-defined relative indication46′ (FIG. 4) for future auctions of 400 shares. Broker/dealer B missedbuying because broker/dealer B's pre-defined relative indication 44 wasfor an inferior price than the pre-defined relative indication 46 ofbroker/dealer C. Broker/dealer B was only willing to pay the customerthe best bid, not the best bid plus $0.05. The automated auction system20 will forward the executions to the exchange for validation, tradereporting and clearance.

[0037] Referring now to FIG. 4, broker/dealer C has a remainingpre-defined relative indication 46′ for future auctions of 400 shares.This pre-defined relative indication 46′ will still be available at thesame priority for future auctions. The auction process 20 includes twoauction parameters that are set for all pre-defined relativeindications.

[0038] The two auction parameters are used to manage exposure, but mayalso have the effect of governing the relative position of thepre-defined relative indications after exhaustion of one of theparameters, and can completely exhaust the predefined relativeindication for the other parameter. These parameters are used to give aparticipant an ability to manage financial exposure. These parametersalso guarantee that no one participant or indication would maintainpreferential position in the auction. One parameter is a maximum shareamount per indication and the other is a maximum share amount perauction.

[0039] If broker/dealer C has not exceeded the maximum share amount perauction it can participate in the current auction in which case itspre-defined relative indication 46′ will retain its time priority andtherefore can match with another order 40 for here 400 shares entered bybroker/dealer A. If the maximum share amount per auction forbroker/dealer C's pre-defined relative indication had been exhausted,then that pre-defined relative indication 46′ is lowered in timepriority to the end of a queue for that price grouping. If the maximumshare amount per indication has been exhausted, then the pre-definedrelative indication 46′ is extinguished completely.

[0040] A pre-defined relative indication, therefore, is a willingness oran expression to trade that resides in the system and remains dormantand unseen by other participants. This mechanism also allows tradinginterest to remain anonymous as to price, size and identity. Apre-defined relative indication, when activated, becomes a response thatis priced relative to the National Best Bid/offer (NBBO). The automatedauction system 20 will forward the executions to the exchange forvalidation, trade reporting and clearance.

[0041] Referring now to FIG. 5, a fourth auction example 25 d is shown.In this example 25 d, a customer order 40′ and condition 40 a areentered to sell 600 shares of “XXY”. The condition 40 a is that theorder seeks a specific minimum price improvement of “0.02”. Thus, theorder is at the market (i.e., at the national best bid NBB at the timeof the order execution) plus a minimum price improvement of 2 cents. Theexposure time is 15 seconds. The exposure does not reveal the 0.02condition. This example is illustrative of a conditioned order withinthe example of two pre-defined relative indications.

[0042] In this auction example 25 d, the customer order 40′ seeksspecific minimum price improvement. Broker/dealer B and broker/dealer Chave each pre-defined relative indications 44′, 46′. Broker/dealer B'spre-defined relative indication 44′ improves the National Best Bid (NBB)by 5 cents. If the quote was 49-49 ⅛ at the time the order from thecrowd came in, broker/dealer B's indication 44′ is based on a price of49, the best bid, and thus broker B has a relative response of 49 plus$0.05 for 1000 shares. Because broker/dealer B's pre-defined relativeindication 44′ satisfies the order and all conditions of the order, theorder is matched with broker/dealer B response. Broker/dealer B buys the600 shares at 49 plus $0.05. Since broker/dealer B had a pre-definedindication 44 for a larger amount than the sell order of the customer,the order is filled completely, and broker/dealer B is left with aremaining pre-defined relative indication of 400 shares for futureauctions. Broker/dealer C missed buying because broker/dealer C'spre-defined relative indication 46 was at a lower price than thepre-defined relative indication 44 of broker/dealer B. Broker/dealer Cwas only willing to pay the customer the best bid, not the best bid plus$0.05. The automated auction system 20 will forward the executions tothe exchange for validation, trade reporting and clearance.

[0043] Referring now to FIG. 6, a fifth auction example 25 e is shown.Broker/dealer A enters a customer order 50 to sell 700 shares of “YYY”at the market. The order 50 has an exposure time of 15 seconds. Stock“YYY” has an NBBO 52 of 92-92 {fraction (5/16)}. Shortly after, anotherorder 58′ to buy 500 shares of “YYY” at the market is entered foranother customer by broker/dealer D. Both Broker/dealer B and C receivenotification that an auction to sell 700 shares of “YYY” has started.Only broker/dealer C sends a response 56, subsequent to entry of thecustomer order of broker/dealer D. The automated auction system 20executes the trade between the two customer orders of Broker/dealer Aand Broker/dealer D, since the customer order of Broker/dealer D wasentered before Broker/dealer C responded. The order execution price isthe mid-point of the NBBO, i.e., the mid-point of the spread, which inthis example is 92 {fraction (5/32)}. The remainder of the order (200shares) is executed with Broker/dealer C at the NBBO. The automatedauction system 20 will forward the executions to the exchange forvalidation, trade reporting and clearance.

[0044] Referring now to FIG. 7, in example 25 f broker/dealer A enters acustomer order 60 to sell 700 shares of stock “YYY” at the market. Theorder 60 has an exposure time of 15 seconds. The NBBO for “YYY” is 25-25{fraction (1/16)}. Both Broker/dealer B and C receive notification thatan auction to sell 700 shares of “YYY” has started. Only broker/dealer Celects to respond 66 to buy only 500 shares.

[0045] The automated auction system 20 will execute the order betweenBroker/dealer A and Broker/dealer C for 500 shares at the NBBO. Theremainder of the order (i.e., 200 shares) remains active until theoriginal 15 seconds elapses, at the end of which, if no other offsettingorders are entered on the opposite side of the market, and no otherpre-defined relative indications or responses come in, the order balanceof 200 shares is eligible for a market maker guarantee if it is a publicorder. That is, specially-designated market makers will guarantee theexecution of the order at the NBB, thus buying 200 at the NBB existingat the end of the exposure period, i.e., 25, if the market were still25-25 {fraction (1/16)}. If there still remains a balance after the endof the market maker guarantee, the balance is delivered to the bestavailable market for the stock on other exchanges or markets unlessrequested otherwise, as described more fully below at the end of serverprocess 100. The automated auction system 20 will forward the executionsto the exchange for validation, trade reporting, and clearance.

[0046] Referring now to FIG. 8, in example 25 g broker/dealer A is amarket maker that trades with its own customers. Broker/dealer A entersa customer order 70 to sell 900 shares of stock “ZZZ” at the market.Broker/dealer A enters this order with a special condition. There can beseveral special conditions. Examples of special conditions includematching the nominal price improvement of the crowd, sharing up to a 50split, and block match trading. The Broker/dealer determines the tradecondition at order entry. Using the price improvement match condition,that condition allows broker/dealer A to trade with its customer unlessthe crowd responds with more than a nominal price improvement, e.g.,better than NBBO+0.02 cents.

[0047] In this example, the order 70 has an exposure time of 30 seconds.The stock “ZZZ” has a NBBO 132-132 ⅛. Both Broker/dealer B and C receivenotification that an auction to sell 900 shares of “ZZZ” has started.Only broker/dealer C elects to respond, with a relative response 76 ofNBBO+0.01. The automated auction system 20 will execute the entire orderbetween Broker/dealer A and Broker-/dealIe A's customer at NBBO+0.01cents because no crowd member provides more than the nominal priceimprovement e.g., 0.02.

[0048] If Broker/dealer's C response was for NBBO+0.03 cents, the orderwould have been executed with broker/dealer C up to the size ofbroker/dealer C's response, since in this example, broker/dealer C wouldhave provided more that nominal price improvement. The automated auctionsystem 20 will forward the executions to the licensed exchange forvalidation, trade reporting, and clearance.

[0049] The 50% split trading condition allows the crowd to obtain up toa set percentage e.g., 50% of the order at various prices. If there iscrowd interest beyond 50% of the order, the broker/dealer will trade atthe prices of the crowd interest that is beyond 50% of the order, andfor any balance beyond that the broker/dealer will trade at the NBBO.For block match trading, the broker/dealer specifies an amount that thebroker/dealer would facilitate the block at after the crowd had anopportunity to respond up to some portion of the block, e.g., 20%. Thebroker/dealer would take the 20% of the block with the crowd having anopportunity for the balance. If there are no responses, the dealer takes20% of the block and the balance is unexecuted. The unexecuted balancecould execute outside of the system. If there is crowd interest, thecrowd trades for portions of the block at various prices up to 80% ofthe block, and the broker/dealer trades for any remainder of the block.If there is crowd interest beyond 80%, the broker dealer trades at theprice established by the crowd up to the crowd interest, i.e. thequantity specified by the crowd. Any balance will trade at the NBBO.

[0050] The broker/dealers can also act as principals, i.e., act fortheir own account or as registered market makers. A registered marketmaker is a type of broker/dealer that has its own distribution networkfor the receipt of orders. For instance, large brokerage houses may havemany branch offices and receive orders from those branch offices. Theycan execute the orders internally meaning that if they are a marketmaker on a specific security, they will execute the trade themselvesinstead of delivering the trade to an exchange for exposure and/orinteraction with others for execution. The auction system 10 enables theorder to obtain the best price available regardless of whether thebroker/dealer entering it is acting as a registered market maker or in aprincipal, riskless principal, or agency capacity.

[0051] Referring now to FIG. 9A, an exemplary format for an order entry101 for the auction system 10 is shown. The order entry 101 includesinformation 101 a entered by the order entry side of the auction. Theinformation can include a security symbol, an indication of whether theorder is to buy or sell, a quantity, an exposure period, and price,either fixed, market or conditions such as a price improvement relativeto the NBBO or other conditions all or none etc. The order entry 101 istransmitted 101 b to the auction system 20. Orders with a fixed pricemay be treated differently (executed immediately i.e., a zerosecond-order or canceled) depending on regulatory requirements.

[0052] Referring now to FIG. 9B, a format for a response 114 is alsoshown. The response 113 includes information 115 a including a securitysymbol, a price or a price improvement, a quantity of shares and abuy/sell indication. The response information 115 a is also transmitted115 b to the auction system 20 and is placed in a queue (not shown).

[0053] Referring now to FIG. 9C, a format for a pre-defined relativeindication 107 is shown to include an information portion 107 a whichincludes a security symbol, a relative price improvement, a quantity andan indication type, either buy or sell. The information 107 a is alsotransmitted 107 b to the auction system 20. In the auction system 20 thepre-defined relative indication is sorted 107 c by type, e.g., buy orsell and by price and time received.

[0054] Referring now to FIGS. 10A-10B, a server process 100 that may beexecuted on the auction system 20 is shown. The server process 100receives an order 101 entered by the order side 12 of the system 10, viathe order entry format 101 (FIG. 10A). The process 100 exposes 104 theorder to the crowd, i.e., potential responders 14, via an electronicbroadcast over the network systems mentioned above. The system 10displays the size of the order and the order remains displayed for thelife span of the order or until an execution ends the auction. Theprocess 100 compares 106 the order to any existing pre-defined relativeindications, contra-side orders or responses (if responses are chosen tohave a lifetime as discussed below) that exist in the system 10 at orderreceipt.

[0055] If there are pre-defined relative indications or contra-sideorders or responses (if responses have a lifetime) in the system 10, theprocess 100 will attempt to match 108 those existing pre-definedrelative indications or contra-side orders or responses to the order.For predefined relative indications, the match process 108 will examinethe pre-defined relative indication that exists, at the best price andwhich is the oldest at that best price, and will determine whether thatpre-defined relative indication matches any conditions that may existwith the order. The same criteria could be applied to existingcontra-side orders or responses. If there is a match, the order will beexecuted 110 with that pre-defined relative indication.

[0056] If there is not a match, the process can iterate through a queueof pre-defined relative indications, contra-side orders and responses todetermine the next oldest pre-defined relative indications, contra-sideorders and responses at that best price to determine a match. The matchprocess 108 attempts to find the pre-defined relative indications,contra-side orders and responses with the best price improvement or bestprice, as appropriate, and that is the oldest in the auction system 20at that price improvement and which satisfies all conditions of theorder and validating constraints that may apply. For example, if a priceis specified outside of the NBBO it may be matched by the system 20 butwill not pass validation. The system 20 can adjust the price so that itfalls at the NBBO at the time of the execution.

[0057] If there are no matching existing pre-defined relativeindications, contra side order or responses, the process 100 willcontinually receive contra side orders 101, responses 113, and newlyarriving pre-defined relative indications 107. The process 100 willcompare 112 contra side orders 101 to the current order. If there is amatch it will execute the order. If there is no match the process 100will determine if responses or new predefined relative indications 107match 118 the current order.

[0058] The compare for contra side orders and then for responses or newpredefined relative indications implies some preference for contra sideorders. However, the process 100 could compare 112 contra side orders,responses and new predefined relative indications to the current orderusing an age and/or price criteria.

[0059] If there is a match it will execute the order. If there is nomatch the process 100 will determine if responses or new pre-definedrelative indications 107 match 118 the current order. The process 100will perform the compare and matches over a life span window that isdetermined by the exposure period specified 119 by the order entry 101.If the process 100 determines a match 116 or 118, the order will beexecuted 117. Otherwise, the process 100 will continue to wait until theexposure time period 119 specified in the order 101 has elapsed 118. Ifthe process 100 does not receive a matching response within that timeperiod, as shown in FIG. 10B, the process 100 will expire 124 theauction process for that order.

[0060] The process 100 will determine 122 whether there are other ordersin the auction and, if there are other auctions, will return to compare106 the other received orders to the pre-defined relative indicationsand so forth to start a new auction. If the process 100 expires theorder 119, the process 100 will also send 120 the expired order or anyunexecuted portion of the order to a guarantee process and/or executionoutside of the process 100.

[0061] An alternative arrangement to that shown above could have theprocess 20 allow responses to have a lifespan coextensive with thelifespan of the auction process. If the system 20 allows responses tohave a lifespan, but if there are no other orders, the process 100 willexpire (not shown) all remaining responses in the system 20.

[0062] Another example would have the compare 106 and match 108performed only for predefined relative indications. If there was not amatch with a predefined relative indication, the process 100 woulditerate through a queue of pre-defined relative indications to determinethe next oldest pre-defined relative indication, at that best price todetermine a match. The match process 108 attempts to find thepre-defined relative indication with the best price improvement, andthat is the oldest in the auction system 20 at that price improvementand which satisfies all conditions of the order and validatingconstraints that may apply.

[0063] A still further option could have the entry of an order start anauction process at which time the auction system 20 could collect allresponses over the exposure duration. The auction system would then sortthe received responses by some criteria that produces the best responsebased on price and size.

[0064] Referring now to FIG. 10C, the expired order or any remainingportion thereof is transmitted 120, if qualified 123 for guaranteedexecution 125, against certain designated market makers who will bematched with the order at the prevailing NBBO, up to the lesser of anestablished threshold (e.g. 1099 shares and is a public agency order) orthe size associated with the NBBO. If, after any match has occurred, anunexecuted balance still remains 126, that order balance is transmitted128, (unless the customer has indicated otherwise) to the market quotingthe best price in that stock, such market being another exchange ormarket that trades the security and with which there is maintained alink for delivering orders. For example, in the case of anexchange-listed stock the link that would be used currently is theIntermarket Trading System (ITS), or, in the case of a Nasdaq stock, thelink would be Small Order Execution System (SOES^(SM))and/orSelectNet^(SM), or a successor system. Thus, at each stage of theprocess, from auction, through market maker guarantee, and then, ifthere is a balance, through to other market centers, the original orderhas an opportunity for price improvement, but in any case should alwaysobtain the best prices publicly available in the marketplace as a whole.

[0065] Referring now to FIG. 11, a pre-defined indication rankingprocess 105 is shown for ranking pre-defined indications by priceimprovement and time received. The pre-defined indication rankingprocess 105 receives 130 a pre-defined relative indication and assigns132 it a time stamp. The process determines 134 whether the pre-definedrelative indication is for a buy or a sell. If the pre-defined relativeindication is for a buy, the process 105 parses 136 the pre-definedrelative indication to extract the price improvement “pi”, as specifiedin the pre-defined relative indication. This price improvement “pi” iscompared 138 to previously received price improvements “pi_(q).” Thecompare process 138 looks to find a previously received priceimprovement grouping that is equal to, greater than, or less than thecurrent price improvement. If the process 105 finds a price groupingthat is equal to a current price improvement “pi” the process 105 places140 the received pre-defined relative indication at the end of thatprice improvement grouping. Otherwise, a new grouping at the highest,lowest, or at an intermediate price improvement level is produced forthe received pre-defined relative indication.

[0066] The process 105 will perform a similar sorting process 105including comparing 138′ and placing the received pre-defined relativeindication into a price improvement grouping if the received pre-definedrelative indication is determined 134 to be a sell indication. After theprocess 105 sorts the received predefined relative indication, itreturns 144. The process can keep track of the pre-defined relativeindication by use of a queue (not shown).

[0067] Referring now to FIG. 12, the match process 118 is shown. At theinitiation of the auction, the match process 118 retrieves 160 anyresponse or new pre-defined relative indication in the auction system20. The match process 116 determines if the retrieved new pre-definedrelative indication or a response matches 162 to the current order. Ifthere is a match 166, the match process 118 will tentatively execute 117(FIG. 10A) the order with the matched response 113, or new pre-definedrelative indication 107 or newly arriving contra side orders. If thereis not a match, the match process 118 will increment a pointer forexample, to the next oldest pre-defined relative indication or willexamine a new response. The match process 118 retrieves 160 the nextoldest pre-defined relative indication and will repeat the match process118 to determine if the retrieved pre-defined relative indication or anew response matches 162 the order. If there is a match, the matchprocess 118 will execute 117 the order with the matching response,pre-defined relative indication. The match process 118 will continueuntil the lifetime period has expired or until an order has beenexecuted.

[0068] The match process 108 (FIG. 10A) matches orders with pre-definedrelative indications that pre-existed at order entry. The match process108 matches first on the basis of best price and then on the basis ofoldest pre-defined relative indication at. the best price. On the otherhand, the match process 118 matches against active responses, andsubsequently received predefined relative indications by the oldest thatmeets the terms of the order.

Other Embodiments

[0069] It is to be understood that while the invention has beendescribed in conjunction with the detailed description thereof, theforegoing description is intended to illustrate and not limit the scopeof the invention, which is defined by the scope of the appended claims.Other aspects, advantages, and modifications are within the scope of thefollowing claims. For example the auction process can be used with otherproducts such as goods, commodities, works of art, etc. It is especiallysuitable for items that have a value that can change over time inaccordance with fluctuations in market conditions.

What is claimed is:
 1. A method of auctioning products, said methodexecuted over a distributed networked computer system, said methodcomprising: entering an order for a product, the order specifying aprice which can be a relative price, a market price or a fixed price,and specifying a quantity and an exposure time; entering a response toan order, the response specifying a price, which can be a relative,fixed price or a relative price with a price improvement, and quantity;and matching the order with the response in accordance with the exposuretime specified by the order.
 2. The method of claim 1 wherein aplurality of orders and responses are entered, and wherein matchingfurther comprises: matching a first one of the orders with the responsesduring the exposure time interval specified by the order.
 3. The methodof claim 1 wherein a plurality of orders and responses are entered, andwherein matching further comprises: collecting all responses during theexposure interval, and matching a first one of the orders to an optimalone of the responses that is determined in accordance with price andquantity specified in the optimal one of the responses.
 4. The method ofclaim 1 wherein the products are financial instruments.
 5. The method ofclaim 1 wherein matching retrieves an oldest response and determineswhether the oldest response includes a price that satisfies a pricespecified by the order.
 6. The method of claim 1 further comprising:expiring the order if the exposure time specified by the order haselapsed and no matching response was received.
 7. The method of claim 1further comprising: entering pre-defined relative indications thatcorrespond to a willingness to buy or sell the product; and wherein thepre-defined relative indications specify a price relative to a currentmarket price.
 8. The method of claim 7 wherein the pre-defined relativeindications specify a quantity of the product.
 9. The method of claim 1wherein entering orders further comprises: specifying a product.
 10. Themethod of claim 1 wherein entering responses further comprises:specifying a product.
 11. The method of claim 7 wherein matching furthercomprises: retrieving an oldest response, other order, or predefinedrelative indication and determining whether the oldest response, otherorder, or pre-defined relative indication satisfies the order.
 12. Themethod of claim 7 wherein retrieving further comprising: matchingpre-defined relative indications to the order with the pre-definedrelative indications ranked by price and within a price ranking by time.13. The method of claim 12 further comprising: expiring the order if theexposure time specified by the order has elapsed and no matchingresponse, other order, or pre-defined relative indication was received.14. A method of auctioning financial products over a distributed,networked computer system, said method comprising: entering orders forfinancial products into the distributed, networked computer system, saidorders specifying a price for the financial product, a quantity of thefinancial product and exposure time which the order can remain active;entering responses to orders for the product, said responses specifyinga price and quantity; and for a first one of said orders, matching saidfirst order, to the responses and contra-side orders, during an intervaldetermined by the exposure time specified by said first order; andexpiring the first one of the orders if no matching responses orcontra-side orders are received during the exposure period.
 15. Themethod of claim 14 further comprising: executing a trade between thefirst order and one of the contra-side orders or responses that matchedthe first order.
 16. The method of claim 15 wherein executing a tradefurther comprises: reporting the first order and the matched one of thecontra-side orders or responses to a facility of a self-regulatoryorganization for market validation.
 17. The method of claim 14 whereinthe orders can further include conditions attached to the order.
 18. Themethod of claim 17 wherein the conditions can include a priceimprovement.
 19. The method of claim 14 wherein entering furtherincludes entering pre-defined relative indications.
 20. The method ofclaim 19 wherein entering pre-defined relative indications can occurbefore or after an order is entered.
 21. The method of claim 14 whereinthe process determines whether a match price falls outside of a spreadspecified for the product.
 22. The method of claim 14 wherein fortrading by a broker dealer, the system allows the broker/dealer tospecify specific trading options when the broker dealer is trading withits own customer.
 23. The method of claim 14 wherein an expired order issent for a guarantee execution by a market maker or for execution on amarket or an exchange.
 24. A computer program product for auctioningproducts, said computer program product residing on a computer readablemedium comprising instructions for causing a computer to: receive anorder that was entered for a product, the order specifying price,quantity and exposure time; receive a response that was entered inresponse to an order, the response specifying a price, priceimprovement, and quantity; and match the order with the response duringthe exposure time specified by the order.
 25. The computer programproduct of claim 24 wherein the products which are auctioned areproducts that have a value that changes with market conditions.
 26. Thecomputer program product of claim 24 wherein instructions that cause thecomputer to match further comprise instructions that cause the computerto: retrieve an oldest response and determine whether the oldestresponse includes a price that satisfies a price specified by the order.27. The computer program product of claim 24 further comprisinginstructions that cause a computer to: expire the order if the exposuretime specified by the order has elapsed and no response that matched theorder was received.
 28. The computer program product of claim 24 furthercomprising instructions that cause the computer to: receive pre-definedrelative indications that correspond to a willingness to buy or sell theproduct, with the pre-defined relative indications specifying a pricerelative to a current market price.
 29. The computer program product ofclaim 25 wherein the pre-defined relative indications specify aquantity.
 30. The computer program product of claim 24 wherein ordersspecify a product.
 31. The computer program product of claim 24 whereinresponses specify a product.
 32. The computer program product of claim24 wherein instructions that cause the computer to match furthercomprise instructions that cause a computer to: retrieve an oldestresponse, contra-side order, or predefined relative indication anddetermine whether the oldest response, contra-side order, or pre-definedrelative indication satisfies the order.
 33. A system for auctioningfinancial products over a distributed, networked computer system, saidsystem comprising: a plurality of workstations for entering orders forfinancial products into the distributed, networked computer system, saidorders specifying a price for the financial product, a quantity of thefinancial product and exposure time which the order can remain active; aplurality of workstations for entering responses to orders for theproduct, said responses specifying a price and quantity; a servercomputer coupled to the workstations for entering the orders and theresponses, said server computer executing a server process that for afirst one of said orders, determines a match to said first order withthe responses and contra-side orders during an interval determined bythe exposure time specified by said first order.
 34. The system of claim33 wherein the server process executes a trade between the first orderand one of the other orders or responses that matched the first order.35. The system of claim 34 wherein the server process executes a tradeand reports the first order and the one of the contra-side orders orresponses that matched the first order to a facility of aself-regulatory organization for market validation.
 36. The system ofclaim 35 wherein the orders can further include conditions attached tothe order.
 37. The system of claim 36 wherein the conditions can includea price improvement.
 38. The system of claim 33 wherein the responseworkstations can enter pre-defined relative indications that can existin the system before an auction for the product has started.
 39. Thesystem of claim 33 wherein the response workstations can enterpre-defined relative indications after an order was entered.
 40. Asystem for auctioning financial products over a distributed, networkedcomputer system comprises: a plurality of workstations for enteringorders for financial products into the distributed, networked computersystem, the orders specify a price for the financial product, a quantityof the financial product and exposure time which the order can remainactive; a plurality of workstations for entering predefined relativeindications and responses to orders for the product, the predefinedrelative indications specifying a willingness to trade, the responsesspecifying a price and quantity; and a server computer coupled to theworkstations for entering the orders, predefined relative indications,and the responses, with the server computer executing a server process,said server process comprising software to: determine a match to a firstorder with the predefined relative indications, responses andcontra-side orders during an interval determined by the exposure timespecified by said first order.